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Incoterms® (International Commercial Terms) serve as essential guidelines in international trade, defining the responsibilities of buyers and sellers regarding the delivery of goods. Established by the International Chamber of Commerce (ICC), these rules are crucial for avoiding misunderstandings in global transactions. However, the misuse or misapplication of Incoterms can lead to costly financial, operational, and legal consequences that disrupt supply chains and damage business relationships.
Here, we explore the potential risks of incorrect Incoterms usage and outline strategies to safeguard your operations.
What are Incoterms and why are they critical?
Incoterms are internationally recognised rules that determine the obligations, risks, and costs shared between buyers and sellers in the delivery of goods. These terms clarify who is responsible for transportation, insurance, customs clearance, and other aspects of trade. Proper use of Incoterms ensures transparency and helps mitigate risks, while misuse can result in inefficiencies, disputes, and unexpected costs.
Key risks of incorrect Incoterms usage
- Financial disputes and unexpected costs: Misusing Incoterms can result in ambiguous cost allocations between trading parties. For example, selecting an inappropriate term may leave one party bearing unforeseen expenses related to transportation, insurance, or customs duties, leading to financial strain and potential disputes.
- Insurance complications: Incorrect application of Incoterms can affect insurance coverage. If responsibilities for insurance are not clearly defined, it may lead to situations where goods are underinsured or not insured at all during transit, exposing parties to significant financial risks in the event of loss or damage.
- Customs clearance delays: Ambiguity in responsibilities for customs procedures can cause delays. If it’s unclear which party is responsible for export or import clearance, goods may be held at customs, leading to storage fees and delayed deliveries.
- Legal disputes: Misinterpretation of Incoterms can lead to breaches of contract, resulting in legal disputes. Such conflicts not only strain business relationships but also incur legal costs and divert focus from core business activities.
How to avoid Incoterms misuse
- Stay updated on the latest Incoterms version
The ICC updates Incoterms periodically to reflect changes in global trade practices. Always use the latest version (Incoterms® 2020) to ensure compliance and avoid outdated practices.
- Educate your team
Training is critical to ensuring that your team understands how to select and apply the correct Incoterms for specific transactions. Regular workshops or partnering with trade compliance experts can help your organisation stay informed.
3. Choose the right terms for your shipment
Evaluate the nature of your goods, transport mode, and destination when selecting Incoterms. For example, terms like EXW (Ex Works) may be cost-effective but place significant responsibility on the buyer, which may not always be suitable.
- Document responsibilities clearly
Clearly outline the agreed Incoterms in your sales contract to avoid misunderstandings. Specify each party’s responsibilities for transportation, insurance, and customs clearance.
- Seek expert guidance
Partner with logistics professionals or legal advisors with expertise in international trade. They can help you determine the most appropriate terms for your transactions and ensure compliance with local regulations.
- Avoid common mistakes
Be mindful of frequent errors, such as using FOB for containerised goods or failing to clarify who covers unloading costs. Understanding the nuances of each Incoterm® is essential for avoiding such pitfalls.
The role of Noatum Logistics in supporting correct Incoterms usage
With decades of experience and a team of dedicated professionals, we help businesses navigate the complexities of international commerce by providing:
- Trade compliance expertise: We ensure your transactions adhere to the latest regulations, minimising risks related to customs, duties, and trade security programmes like AEO and CTPAT.
- Tailored solutions: Our team helps you select the most appropriate Incoterms based on your shipment needs, reducing costs and ensuring efficient delivery.
- Comprehensive logistics support: From transport to customs clearance, we offer end-to-end solutions designed to optimise your supply chain.
By staying informed, investing in education, and partnering with experienced logistics providers like Noatum Logistics, businesses can mitigate these risks and ensure smooth global operations.
Contact Noatum Logistics today to learn how we can enhance your trade compliance and streamline your logistics processes. Don’t let incorrect Incoterms usage stand in the way of your success in international trade.
Sources:
https://www.trade.gov/know-your-incoterms
https://www.strongandherd.co.uk/the-global-misuse-of-incoterms
https://blog.ventusgl.com/understand-incoterms-key-to-seamless-international-transactions
Avda. De Italia nº2 – CTC